Cryptobubble continued — what is the likeliest scenario from here?

As many people following cryptoassets have discovered, one week in crypto easily equates to a couple of months in any other asset class measured in price swings and news. So even though my last post on the unfolding (bursting?) cryptobubble is just a few days old the time is ripe for a new assessment already. As before, I give a purely personal view (this is not investment advice, cryptoassets can go to zero and you can lose all of your invested fiat) on both the charts as well as the newsflow of the main cryptoasset (Bitcoin) as I assume that all other assets will generally follow its direction.

Technical Analysis

Purely by coincidence a day after my last post, in which I predicted a fall to as low as $2900 per Bitcoin (but admittedly gave that a “medium term” timeline), Bitcoin did indeed correct hard and fulfilled all the mentioned price targets in just one day. Looking at the daily chart below, it was obviously due for a quick bounce.

Daily Chart

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The bounce was likely to happen due to the same reasons that $2900–3400 were reasonable targets for the drop before it happened. At the $2900/3000 level, Bitcoin has strong support from its mid-June high, which was tested again and then finally broken in July and August. Furthermore, this was the target level of the Shoulder-Head-Shoulder formation mentioned in my previous post. Finally, the Relative Strength Index (RSI) bottomed out in strongly oversold territory at the same time, setting the stage for a strong, V-shaped price recovery. The strength of this recovery, as well as the weekly chart is the main reason that I am currently cautious on Bitcoin and the entire space.

Judging by the cryptosphere on Twitter, capitulation (with several well-followed traders calling for people to sell their coins at around the $3300 level) was followed by a very quick shift to strongly bullish sentiment. The pace of this shift, bullish commentary on mainstream TV stations such as CNBC as well as the experience from previous asset bubbles make me very sceptical that we have seen the bottom. If I had to guess, I would say the short term low “is in”, but I believe Bitcoin will struggle to meaningfully clear the $4000/4200 level without new, positive news forcing money from the sidelines to get invested. In these situations I like to look at a longer term picture of the asset I am analysing.

Weekly Chart & Elliot Waves Count

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The weekly chart above includes a count of Elliot Waves (EW). In my view, EWs are a great tool because in its simplest form, it stipulates that assets move in waves and that these waves are a reflection of underlying human psychology. Moreover, human psychology in similar situations is historically relatively stable, i.e. people tend to react in a similar manner over time when faced with similar situations. The downside of EWs is that counting them is easy ex-post, but very hard ex-ante in the sense that there are typically many possible counts and only the actual trading will tell which one is correct. On average however, EWs have been more helpful than not in my experience so I rely on them for medium-term direction.

Without going into the minute details of counting EWs, the basic idea is that the prevailing direction of prices (in Bitcoin’s case upwards) is expressed in segments of five waves (three up, two down), while the upwaves are often microcosms of the macrocount (ie tend to be made up of 5 segments themselves) and the downwaves take the form of three segments (A-B-C, where A is down, B is up and C is down again). I have observed that especially the A-B-C sequence that corrects the prevailing trend is extremely common and I have almost never seen a correction that cannot be split into these three segments.

Applying this count to the price of Bitcoin reveals that it has completed a full bullish macrocycle (I to V). As is typical, wave III is the strongest of the cycle and can very easily be broken down into its own 5 micro waves (green 1–5). If this count is correct (and I need to caution it by saying that there is a slightly less obvious way to count it so that my V becomes III, meaning that wave V would start now), it also means that leg A of the macro correction has taken place and we are now in wave B, which should be a recovery that is unlikely to exceed the mentioned $4000/4200 level and could fall short of that. It is sometimes referred to as the “dead cat bounce”, given that volume tends to be much lower than during wave A. Looking at the volume on the daily chart, note that this is NOT the case. Therefore, there is a case to be made that my count is incorrect. However, taken together with the current newsflow, I do believe that a further correction that may only re-test the $2900 level, but could easily touch $2000 is likely. Interestingly, the RSI shows a slight negative divergence building as well. Of course, a lot will depend on newsflow.

Newsflow

Since my last post there have been two significant news items in my view:

  1. China has indeed followed through on the rumors and has ordered all the local exchanges to cease trading Bitcoin to fiat from September 30th, respective October 31st (the larger exchanges are given more time to comply). Exchanges have generally responded by shutting down operations on the specified date. While this does impact c. 15% of global Bitcoin trade, it was very much a “sell the rumors, buy the news” situation as I hypothesized in my last post.

a. Will not follow China with a blanket ban on fiat to crypto trading

b. Is interested in supporting innovation and wants to avoid killing a nascent new market

c. Views most current token that were ICOed as “securities”, meaning the companies would either need to comply with regulations (publish financial statements, seek counsel and establish compliance functions) or ensure that there are no US investors (which is unlikely to help given that SEC guidance might be seen as a benchmark by other Western regulators who could follow suit). The SEC seems to be using a case-by-case approach.

d. Is still collecting data and will issue additional official guidance in the coming weeks or months

The obvious takeaways from the above (I do not believe #2 is fully appreciated by the market yet by the way) are that the “worst case” scenario in which all other major countries follow China to ban fiat to crypto trading is likely off the table.

Nota Bene: despite the constant urging of the opposite from many in the crypto community, a blanket ban on Bitcoin by governments is actually possible. Perhaps not in a way where all Bitcoin trading would cease (after all, there is a Bitcoin satellite in space now), but law-abiding citizens will not trade in an asset that is banned, nor would it be difficult for governments to find larger mining rings by simply following electricity usage maps and putting an end to their efforts (which would result in extremely slow transactions). So let’s not be fooled by the whole “no one can ban Bitcoin” narrative — for all intents and purposes of “normal” people, governments can ban Bitcoin, which would be enough to make the price drop 95%+ and I assume no one would want to be caught in that storm. So the fact that the SEC is looking to enable innovation and recognizes token sales and cryptocurrencies as such is a genuine positive.

Furthermore, it is likely that future guidance by the SEC enables a regulated cryptocurrency market to take off. Large institutional investors will only enter the market when regulations are stable. While classifying token as securities is likely to hit tokens (aka “altcoins“) and platforms such as Ethereum and NEO very hard, there have already been ICOs that complied with securities regulations (e.g., Filecoin), so a compliant future is not hard to fathom and that is when the blockchain will really start to revolutionize asset transfers and other spaces.

All of this seems to indicate bullish signals in newsflow and I would agree in terms of the medium to longer term. However, I see several clouds on the horizon. My main worries are:

a) The aforementioned SEC guidance leading to an altcoin crash which would mean people exchange their altcoins for Bitcoins and then Bitcoins for fiat, bringing down the entire space. Note that a more radical approach by the SEC might actually see US-based cryptoexchanges halt trading of any non-compliant token, which would make the crash more dramatic.

b) A blow up of Bitfinex and especially USD Tether, which has been rumoured for some time now and would mean a repeat of the Mt Gox debacle (which brought Bitcoin prices down 90%). See the link below for details.

c) The pending fight on the 2x hardfork which is by no means off the table. As I stated in my last post, if the fork is implemented without replay protection, the result would be very harmful for Bitcoin.

Some of these points and quite a few more are discussed in this excellent article that I highly recommend you read: https://seekingalpha.com/amp/article/4107328-bitcoin-bubble-will-pop

Overall, I have a hard time seeing the Bitcoin price sustain its next major leg up without a) and c) above being solved (b is more of a tail risk event really). Therefore, both technical analysis as well as newsflow suggest a medium term bullish set up, but leave ample room for further short term correction and I believe that is a likely course.

To reiterate — this is not investment advice and even great traders are only right 55% of the time.

Written by

Entrepreneur, Fund Manager, Ex-Consultant and Hobby Ice Hockey Player. Child of the Sun. Any opinions personal, never investment advice, sometimes parody

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